The shocker was the infamous “dot plot”: Higher for even longer, ending the year 2024 at 5.25%.
By Wolf Richter for WOLF STREET.
The FOMC kept its five policy rates unchanged today, with the top of its policy rates at 5.50%, after the rate hike at its prior meeting in July. Various Fed governors have had broadly telegraphed this move in recent weeks. The Fed has hiked by 525 basis points so far in this cycle. The vote was unanimous.
The shocker coming out of today’s Fed meeting was the infamous “dot plot,” where individual members of the Fed’s FOMC project the trajectory of monetary policy in the future: As before, they saw one more rate hike in 2023, to 5.75% top of range, but they slashed their rate-cut projections for 2024 by half, from four rate cuts, to just two rate cuts, ending the year 2024 at 5.25%. Higher for longer.
The shocker at last year’s December meeting was that they took rate cuts off the table for 2023. And they stuck to it, and financial markets spent the first eight months of 2023 twisting Powell’s words into man-buns to come up with “Powell was dovish,” and fighting the Fed all the way, and refusing to accept the no-rate-cut scenario in 2023.
With only three months and two FOMC meetings left, markets have finally thrown in the towel on rate-cut predictions for 2023. But now they’ve got a new passion; they’re gearing up to fight the Fed in 2024.
Today, the Fed kept its policy rates at:
- Federal funds rate target range between 5.25% and 5.5%.
- Interest it pays the banks on reserves: 5.4%.
- Interest it pays on overnight Reverse Repos (RRPs): 5.3%.
- Interest it charges on overnight Repos: 5.5%.
- Primary credit rate: 5.5% (what banks pay to borrow at the “Discount Window”).
Higher for longer.
A series of rate hikes are generally followed by plateaus before rate cuts begin. The Fed signaled that the plateau has not been reached yet, and that there may be another hike or two. And it indicated in the dot plot that when the plateau finally starts, it will be longer than previously indicated:
Statement leaves the door open for additional rate hikes. The statement repeated the language of the prior statements, which leaves the door open for more rate hikes:
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
QT continues, with the Treasury roll-off capped at $60 billion per month, and the MBS roll-off capped at $35 billion a month.
The “dot plot.”
One more hike in 2023. In its updated “Summary of Economic Projections” (SEP) today, which includes the “dot plot,” the median projection for the federal funds rate at the end of 2023 was 5.625%, or 5.75% top of range: One more rate hike in 2023. Of the 19 participants, 12 indicated exactly one more hike; 7 indicated no hike.
Two rate cuts in 2024, instead of four rate cuts projected at the June meeting. This would bring the 5.75% at the end of 2023 to 5.25% by the end of 2024, top of range.
Of the 19 participants, 10 participants indicated two or fewer rate cuts in 2024 (1 saw two rate hikes). And 9 participants indicated three or more cuts.
These are the projected mid-points of the target range by the end of 2024, after the 2023 hike to to 5.625%:
- 1 expects: 6.125% (two hikes in 2024)
- 1 expects: 5.625% (no cuts in 2024)
- 4 expect: 5.375% (1 cut)
- 4 expect: 5.125% (2 cuts) = median
- 4 expect 4.875% (3 cuts)
- 3 expect 4.625 (4 cuts)
- 2 expect 4.375 (5 cuts)
Median projections also jacked up expectations for GDP growth for 2023 to 2.1%, from the projections of 1.0% in June.
Median projections for the “core PCE” price index dipped to 3.7% by the end of 2023, from 3.9% at the June meeting.
What banking crisis? Today’s statement repeats the same language about the banking crisis for the third meeting in a row: That the “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” And it repeats that “the extent of these effects remains uncertain.”
And here is my (ok, not always 100% dead-serious) take on Powell’s press conference: “Carefully,” Dude: Powell at the Press Conference
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